Oil Advances to Two-Month High on Budget Deal Optimism

Oil climbed on optimism that
negotiators will reach a last-minute U.S. budget deal averting
more than $600 billion of tax increases and spending cuts that
threaten economic growth.

Futures rose 1.1 percent after President Barack Obama said
he was “hopeful” that Congress will come up with an agreement
to avoid the budget measures known as the fiscal cliff. Senate
Minority Leader Mitch McConnell said lawmakers are “very, very
close” to an accord. Oil in New York dropped for the first year
since 2008 as U.S. output surged.

“It looks like we’ll be getting a deal,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas.
“An agreement has yet to be fully priced in, so prices should
rise further. Going over the fiscal cliff would have raised the
prospect of a global economic recession.”

Crude oil for February delivery increased $1.02 to $91.82 a
barrel on the New York Mercantile Exchange, the highest
settlement since Oct. 18. Prices dropped 7.1 percent this year
and 0.4 percent in the fourth quarter. They rose 3.3 percent in
December. The volume for West Texas Intermediate oil contracts
traded in New York was 53 percent below the 100-day average.

There is no floor trading tomorrow because of the New
Year’s Day holiday. Electronic transactions will halt at 5:15
p.m. New York time today and resume at 6 p.m. tomorrow for
settlement on Jan. 2.

Brent oil for February settlement rose 49 cents, or 0.4
percent, to end the session at $111.11 a barrel on the London-
based ICE Futures Europe exchange. The number of contracts
trading was 55 percent lower than the 100-day average. Brent has
advanced 3.5 percent this year, a fourth annual gain. It slipped
12 cents in December and 1.1 percent in the fourth quarter.

The European benchmark’s premium to WTI narrowed to $19.29,
the least since Sept. 25.

Annual Decline

WTI declined in 2012 as the U.S. shale boom deepened a glut
at Cushing, Oklahoma, America’s biggest storage hub and the
delivery point for the New York contract. That has left it at an
average $17.48 a barrel below Brent this year, compared with a
premium of about 95 cents in the 10 years through 2010.

U.S. crude production rose to 6.984 million barrels a day,
the highest level since 1993, in the week ended Dec. 21, the
Energy Department reported Dec. 28.

“A budget deal would be good for demand,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge
fund that focuses on energy. “There’s fundamental strength to
the market, and an agreement would be a catalyst for higher
prices going into 2013.”

Proposed Agreement

Under a proposed deal, income tax cuts would be extended
for annual income up to $450,000, said an official who spoke on
condition of anonymity, with rates rising to 39.6 percent on
income above that. Expanded unemployment insurance would be
continued through 2013.

“It appears that an agreement to prevent this New Year’s
tax hike is within sight, but it’s not done,” Obama told a
group of what the White House described as middle-class
taxpayers. He urged people to “keep the pressure on over the
next 12 hours or so; let’s get this thing done.”

Even if a deal is reached and can get through both chambers
of Congress, it would be more limited than Obama and leaders of
both parties sought. It would set up another battle early in
2013 over the budget and the federal debt limit.

The U.S. and China are the world’s biggest oil-consuming
countries, together accounting for 32 percent of global crude
demand in 2011, according to BP Plc (BP/)’s Statistical Review of
World Energy.

Chinese Manufacturing

Chinese manufacturing expanded at the fastest pace in 19
months in December, according to the final reading of a
Purchasing Managers’ Index from HSBC Holdings Plc and Markit
Economics today. The 51.5 figure compares with the 50.9
preliminary reading published Dec. 14 and 50.5 in November. A
reading above 50 indicates expansion.

OPEC crude oil production declined to a nine-month low in
December as Saudi Arabian output dropped to the least in more
than a year, a Bloomberg survey showed. Output in the 12-member
Organization of Petroleum Exporting Countries slipped 110,000
barrels to an average 31.434 million barrels a day this month
from a revised 31.544 million in November, according to the
survey of oil companies, producers and analysts.

Saudi Arabia, OPEC’s biggest oil producer, pumped 9.57
million barrels a day of crude in December, the lowest level
since October 2011.

Bullish Bets

Net-long positions in WTI held by money managers, including
hedge funds, commodity pools and commodity-trading advisers,
increased by 13,783 futures and options combined, or 11 percent,
to 134,834 in the week ended Dec. 24, according to the U.S.
Commodity Futures Trading Commission’s weekly report on Dec. 28.

In London, funds and other money managers raised bullish
bets on Brent by the most in a month, data from ICE showed.